The hard truth about starting a fund

By Theodore O'Brien, Managing Director,The Hedge Fund Group, key Biscayne, Florida.

Theodore O'Brien While it is exciting, freeing and potentially extremely lucrative to start an investment fund, I always want to remind those considering going solo with a new fund of the many challenges that await them, especially when it comes to raising capital.

Many investors have a negative attitude toward investing in startups. Some investors see investing in startup hedge funds as an unnecessary risk to the portfolio. Startup hedge funds present a number of potential issues, namely: business risks and performance risks. On the business side, compared to larger, older funds, a new hedge fund will typically have: none of the glamour that larger funds have, like first-class office space in Manhattan; less institutional risk management practices; a smaller or non-existent compliance department; unsophisticated business management, and other business risks that tend to ward off very cautious investors.

As an investor, it is unsettling to interview a startup manager and find it is a one-man shop, based in a home office, and that he is responsible for trading, complying with regulations, filing taxes, legal matters, and every other aspect of running a hedge fund. Investors have to wonder, does the manager have enough savings to support the fund if it endures a few bad quarters? How will he respond when the day-to-day operations grow too time-consuming while also managing the strategy? Will this fund be around in five years? What about five months?

Beyond the business risks of investing in a startup, investors then have to worry about how a startup will perform. Startups must compete with top-quartile hedge funds and face a number of disadvantages. In the early years......................

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This article was published in Opalesque's New Managers a top-down monthly analysis, news and research publication on the global emerging manager space.